Employment Rights – Transfer of an Undertaking

Part 3 – Contracts of employment

The employer’s position

When a relevant transfer takes place, the position of the previous employer and the new employer in respect of the contracts of the transferred employees is as follows:

• The new employer (i.e. the transferee) takes over the contracts of employment of all employees who were employed in the “organised grouping of resources or employees” immediately before the transfer, or who would have been so employed if they had not been unfairly dismissed by reason of the transfer.⁶ The new employer cannot pick and choose which employees to take on. It follows that they cannot terminate contracts and dismiss employees just because the transfer has occurred (see Part 4 for more detail). However, the new employer does not take over the contractsemployees who are only temporarily assigned to the “organised grouping”. Whether an assignment is “temporary” will depend on a number of factors, such as the length of time the employee has been there, and whether a date has been set by the transferor for his return or re–assignment to another part of the business or undertaking.

• The new employer takes over all rights and obligations arising from those contracts of employment, except for criminal liabilities and some benefits under an occupational pension scheme [see below]. This means that they will inherit any outstanding liabilities incurred by the transferor employer by his failure to observe the terms of those contracts or for failure to observe employment rights. So, an employee may make a claim to a court or an employment tribunal against the new employer for, say, breach of contract, personal injury or sex discrimination, even though the breach of contract, injury or discrimination occurred before the transfer took place.

• The new employer takes over any collective agreements made by or on behalf of the transferor employer in respect of any transferring employees and in force immediately before the transfer.

• Where the transferor employer voluntarily recognised an independent trade union (or unions) in respect of some or all of the transferred employees, then the new employer will also be required to recognise that union (or unions) to the same extent after the transfer takes place. However, this requirement only applies if the organised grouping of transferred employees maintains an identity distinct from the remainder of the new employer’s business. If the undertaking does not keep its separate identity, the previous trade union recognition lapses, and it will then be up to the union and the new employer to renegotiate a new recognition arrangement. It should be noted that where at the time of the transfer a union is recognised by the transferor employer via the statutory recognition procedure, then different arrangements apply.⁷

Q. Can the transferor employer select the employees who transfer across ?

A. No. He cannot retain individuals who were assigned to the organised grouping immediately before the transfer. However, this does not prevent the transferor from retaining those individuals whom he had permanently re–assigned to other work outside the “organised grouping” in advance of a transfer.

Q. Does this mean that the new employer must actually employ a person who was unfairly dismissed before the transfer where they had previously worked in the entity or grouping which then transferred?

A. No. There is no obligation on the new employer to provide a job to such former employees of the transferor. However, they are responsible for all outstanding liabilities relating to such persons which result from their former employment. So, the new employer would be the respondent should a former employee complain to an employment tribunal that he was unfairly dismissed. The employment tribunal may order reinstatement or re–engagement.

Q. How can the new employer employer ensure he does not suffer a loss for a failure of the transferor employer prior to the transfer ?

A. It is common practice for the new employer to require the transferor employer to indemnify him against any losses from such pre–transfer breaches of contracts or employment law. Also, the Regulations require the transferor to inform the new employer in advance of the transfer about such liabilities towards the employees. (see Part 5).

The employee’s position

When a relevant transfer takes place, the position of the employees of the transferor and new employer is as follows:

• Employees employed in the “organised grouping” immediately before the transfer automatically become employees of the new employer . However, an employee has the right to object to the automatic transfer of their contract of employment if he so wishes, as long as they inform either the transferor or the new employer that he objects to the transfer of his contract to the transferee. In that case, the objection terminates the contract of employment and the employee is not treated for any purpose as having been dismissed by either the transferor or the new employer. Moreover, the employee is considered to have resigned and would therefore not be entitled to a redundancy payment. The transferor may re–engage the employee on whatever terms they agree, though the continuity of employment will be broken.

• An employee’s period of continuous employment is not broken by a transfer and, for the purposes of calculating entitlement to statutory employment rights, the date on which the period of continuous employment started would usually be the date on which the employee started work with the old employer.⁸ This should be stated in the employee’s written statement of terms and conditions; if it is not, or if there is a dispute over the date on which the period of continuous employment started, the matter can be referred to an employment tribunal. (For further details, visit www.berr.gov.uk ).

• Transferred employees retain all the rights and obligations existing under their contracts of employment with the previous employer and these are transferred to the new employer. This means that their previous terms and conditions of employment carry over to the new employer. The main exception to this rule concerns the treatment of occupational pensions.

Q. How are occupational pensions treated when a relevant transfer occurs ?

A. Occupational pension rights earned up to the time of the transfer are protected by social security legislation and pension trust arrangements.

The new employer is not required to continue identical occupational pension arrangements for the transferred employees. However, where transferred employees were entitled to participate in an occupational pension scheme prior to the transfer, the new employer employer must establish a minimum level of pension provision for the transferred employees. This minimum ‘safety net’ requires the new employer to match employee contributions, up to 6 per cent of salary, into a stakeholder pension, or offer an equivalent alternative. ⁹ In the public sector, the Government will continue to follow the policy set out in the HM Treasury note “A Fair Deal for Staff Pensions”. As explained in Part 2, the Local Government Act 2003 contains provisions for Directions to be issued to best value authorities concerning contracting–out exercises. The Act also provides that those Directions should make certain provisions concerning pension benefits for the local authority staff affected by those exercises. The Directions have not yet been issued.

Changes to terms and conditions

The Regulations ensure that employees are not penalised when they are transferred by being placed on inferior terms and conditions. So, not only are their pre–existing terms and conditions transferred across on the first day of their employment with the new employer , but employees may not validly waive their acquired rights. The Regulations therefore impose limitations on the ability of the new employer and employee to agree a variation to terms and conditions thereafter. In particular, the new employer must never vary contracts where the sole or principal reason is :

• the transfer itself; or
• a reason connected with a transfer which is not “an economic, technical or organisational reason entailing changes in the workforce”.

If contracts are varied for these reasons, then those variations are rendered void by the Regulations.The same restrictions apply to the transferor where he contemplates changing terms and conditions of those employees who will transfer to the new employer in anticipation of the transfer occurring.

As mentioned, the underlying purpose of the Regulations is to ensure that employees are not penalised when a transfer takes place. Changes to terms and conditions agreed by the parties which are entirely positive are not prevented by the Regulations.

Q. What is the difference between an action that is by reason of the transfer itself and that which is for a reason which “is connected with” the transfer?

A. Where an employer changes terms and conditions simply because of the transfer and there are no extenuating circumstances linked to the reason for that decision, then such a change is prompted by reason of the transfer itself. However, where the reason for the change is prompted by a knock–on effect of the transfer – say, the need to re–qualify staff to use the different machinery used by the transferee – then the reason is “connected to the transfer”.

Q. What is an “economic, technical or organisational” reason?

A. There is no statutory definition of this term, but it is likely to include;

• a reason relating to the profitability or market performance of the new employer’s business (i.e. an economic reason);
• a reason relating to the nature of the equipment or production processes which the new employer operates (i.e. a technical reason); or
• a reason relating to the management or organisational structure of the new employer’s business (i.e. an organisational reason).

Q. What is meant by the phrase “entailing changes in the workforce” ?

A. There is no statutory definition of this term, but interpretation by the courts has restricted it to changes in the numbers employed or to changes in the functions performed by employees. A functional change could involve a new requirement on an employee who held a managerial position to enter into a non–managerial role, or to move from a secretarial to a sales position.

The Regulations also provide some freedom for a transferor employer or the new employer to agree with an employee to vary an employment contract before or after a transfer. The employer and employee can agree to vary an employment contract where the sole or principal reason is :

• a reason unconnected with the transfer; or
• a reason connected with the transfer which is “an economic, technical or organisational reason entailing changes in the workforce”.

A reason unconnected with a transfer could include the sudden loss of an expected order by a manufacturing company or a general upturn in demand for a particular service or a change in a key exchange rate.

It must be remembered that other elements of employment law continue to apply to contracts in the context of a TUPE transfer. Therefore an employer cannot validly impose new terms and conditions without the agreement of employees. Any changes would have to be agreed by the employee or by his union representatives on his behalf.

Q. Does this freedom to vary contracts permit the new employer to harmonise the terms and conditions of the transferred workers to those of the equivalent grades and types of employees he already employs ?

A. No. According to the way the courts have interpreted the Acquired Rights Directive, the desire to achieve “harmonisation” is by reason of the transfer itself. It cannot therefore constitute ”an ETO reason connected with a transfer entailing changes in the workforce”.

Q. Is there a time period after the transfer where it is “safe” for the new employer to vary contracts because the reason for the change cannot have been by reason of the transfer because of the passage of time ?

A. There is likely to come a time when the link with the transfer can be treated as no longer effective. However, this must be assessed in the light of all the circumstances of the individual case, and will vary from case to case. There is no “rule of thumb” used by the courts or specified in the Regulations to define a period of time after which it is safe to assume that the transfer did not impact directly or indirectly on the employer’s actions.

Q. How do the Regulations affect annual pay negotiations or annual pay reviews?

A. These should be little affected, and should continue under the new employer employer in much the same way as they operated with the transferor employer.